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Higher Ed Watch

A Blog from New America's Higher Education Initiative

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Students vs. Shareholders at Publicly Traded Career Colleges

Published:  March 3, 2010

Whose needs do most publicly traded for-profit higher education companies put first? If you have any doubt, look no further than what Gary McCullough, the president and chief executive officer of Career Education Corporation, had to say when he met recently with the editorial board at The Wall Street Journal.

In comments he made to the newspaper’s reporters and editors, McCullough complained that recent efforts by the U.S. Department of Education to rewrite its student aid regulations to better protect students from unscrupulous schools had spooked Wall Street, driving down the share prices of his company’s stock and those of its competitors. “There’s a pall that hangs over the education space right now,” he stated.

Of particular concern, he said, is a proposal that the Education Department has floated that seeks to prevent proprietary schools from saddling their students up with unmanageable levels of student loan debt. Under the plan, the amount of debt that most for profit college students (as well as those enrolled in other types of job training programs) could take on would be directly tied to the annual starting salaries in the fields for which they sought training. According to the Department (see p. 58), the goal would be to ensure that “a student’s starting annual income is adequate to repay the average debt service obligation for someone completing a specific program, while still having an adequate amount available to meet living expenses.”

If the Education Department moves forward with such a proposal, McCullough warned, it “would change the whole landscape” of higher education. But what would the ramifications be for the tens of thousands of students who attend Career Ed schools throughout the country? According to the newspaper:

McCullough said that if the proposal is implemented, Career Education may have to lower prices so as to limit the debt load its students take on, or even cut some programs in which students graduate into low-paying jobs.” [emphasis added]

Oh, the horror! Lower prices, less debt, and the elimination of programs that do not provide students with enough income to cover their loan bills -- what could the Department possibly be thinking?

In reality, such changes are long overdue. As it is now, the company’s schools are among the most expensive proprietary institutions in the country and the majority of students who attend do not complete their programs (as we recently pointed out, only 16 percent of students who entered the main campus of Career Ed’s American Intercontinental University in 2002 graduated within six years, according to data collected by the Department of Education). Meanwhile, many of these students leave heavily indebted. In fact, for years, the company aggressively steered its most financially needy students to take out high-cost private student loans from Sallie Mae, with annual interest rates as high as 20 percent. Facing huge losses on these loans, the student loan giant eventually terminated the deal it had with the company. Since then Career Ed has been making these high-risk loans itself even though it expects nearly half of the funds it provides to students to end up in default.

Clearly the schools’ students would be much better off if the company could truly guarantee them the training they need to obtain gainful employment in high-paying fields as their advertisements promise. We’d argue that the company would also be better off in the long term, with substantially improved outcomes and a thriving alumni network that could help promote the school (rather than heavily populating consumer complaint websites like ripoffreport.com).

Unfortunately, Wall Street doesn’t see it that way. Instead, investors demand that these for-profit higher education companies continue to grow at almost any cost. Any retrenchment, even if it is ultimately in the best long term interests of the schools and their students, sets off alarm and panic. Just look at how the market has reacted so far to the welcome news that the University of Phoenix is planning to slow down its enrollment growth in its undergraduate programs.

Keep this in mind the next time you hear the leaders of publicly traded for profit higher education companies such as Career Ed claim that “students are their No. 1 concern,” as The Chronicle of Higher Education recently put it. Their shareholders know better than that.

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